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IPOs and SEOs, real investments, and market timing: Emerging market evidence

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  • Wadhwa, Kavita
  • Nagi Reddy, V.
  • Goyal, Abhinav
  • Mohamed, Abdulkadir

Abstract

This study uses market-to-book ratio decomposition to examine whether firms that issue equity through initial public offerings or seasoned equity offerings exploit mispricing because of investor enthusiasm or to finance growth opportunities. We find strong evidence that, on average, firms do not issue mispriced stocks to exploit investors but, rather, to finance their investment opportunities in the form of real assets, inventory, and capital expenses. Firms that issue overvalued stocks with the view to increase their cash holdings experience poor long-run performance. Overall, our results show that stock mispricing drives equity offerings through IPOs and SEOs. Nonetheless, high transparency and balanced regulation in the marketplace deter issuing firms from investing their proceeds in non-value-creating activities. This evidence is robust to alternative measures of valuation and long-run performance.

Suggested Citation

  • Wadhwa, Kavita & Nagi Reddy, V. & Goyal, Abhinav & Mohamed, Abdulkadir, 2016. "IPOs and SEOs, real investments, and market timing: Emerging market evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 45(C), pages 21-41.
    • Handle: RePEc:eee:intfin:v:45:y:2016:i:c:p:21-41
    DOI: 10.1016/j.intfin.2016.05.007
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    Cited by:

    1. Syamala, Sudhakara Reddy & Wadhwa, Kavita & Goyal, Abhinav, 2017. "Determinants of commonality in liquidity: Evidence from an order-driven emerging market," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 38-52.
    2. Wadhwa, Kavita & Syamala, Sudhakara Reddy, 2019. "Role of market timing and market conditions: Evidence from seasoned equity offerings," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 555-566.
    3. Wadhwa, Kavita & Neupane, Suman & Syamala, Sudhakara Reddy, 2019. "Do group-affiliated firms time their equity offerings?," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 73-92.
    4. Syamala, Sudhakara Reddy & Wadhwa, Kavita, 2019. "Foreign institutional investors’ trading and information dissemination in emerging markets: Further evidence," Research in International Business and Finance, Elsevier, vol. 49(C), pages 301-314.
    5. Espenlaub, Susanne & Goyal, Abhinav & Mohamed, Abdulkadir, 2016. "Impact of legal institutions on IPO survival: A global perspective," Journal of Financial Stability, Elsevier, vol. 25(C), pages 98-112.
    6. Qureshi, Fiza & Kutan, Ali M. & Ismail, Izlin & Gee, Chan Sok, 2017. "Mutual funds and stock market volatility: An empirical analysis of Asian emerging markets," Emerging Markets Review, Elsevier, vol. 31(C), pages 176-192.
    7. Syamala, Sudhakara Reddy & Wadhwa, Kavita, 2020. "Trading performance and market efficiency: Evidence from algorithmic trading," Research in International Business and Finance, Elsevier, vol. 54(C).

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    More about this item

    Keywords

    IPOs; SEOs; Market-timing; Investment funding; Market-to-book ratio; Residual income model; Long-run performance;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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